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A la Modi: the India managers to back in a boom
In light of the BJP victory, we reveal the best Indian equity managers for the good times and the bad.
by Robert St George on Jun 19, 2014 at 08:00
The Bharatiya Janata Party is in full swing. Narendra Modi (pictured) led it to victory in India’s election last month, winning the largest majority for any government in the country for 30 years.
The market has welcomed his triumph, with the MSCI India index up by 18% so far this year in sterling terms – far outstripping the 3% posted by emerging markets in general.
Investor confidence is premised not only on the scale of the landslide, which means Modi won’t have to form a coalition, but on expectations of pro-business reform. The incoming prime minister has promised reliable electricity and water across the country, implying substantial spending on infrastructure and development, while reducing bureaucracy and simplifying the tax system are also believed to be priorities.
If that all comes to pass, Indian equities should continue to rally. So who are the best bull-market managers in the sector?
Prashant Khemka, Goldman Sachs
Indian stocks recorded their strongest recent run in 2012, gaining 19% that year in sterling terms while emerging markets more widely rose by 10%.
Khemka took first place for the year with an impressive risk-adjusted score of 1.5, far ahead of the peer group average of 0.15. Khemka’s growth credentials are also emphatic: his portfolio has a 54.3% weighting to small and mid-sized companies, which comprise just 18.4% of its MSCI India index.
Somewhat inevitably, 2012 was followed by 2013, a much less lucky year for such managers as the market dropped by 7% in sterling terms. Duggal slipped to the very bottom of the pile, although Khemka remained above average.
Rather, last year’s star turns in the bear phase came from Citywire AAA-rated David Gait and Pictet’s Prashant Kothari. Reflecting the more difficult environment, though, neither achieved a risk-adjusted score above 1: Gait came close with 0.99 and Kothari posted 0.72, while the average for the peer group was negative at -0.2 signifying their failure to outperform the benchmark.
David Gait, First State
Citywire AAA-rated David Gait is a mere speck in this sector by fund size, a factor of his £195 million First State Indian Subcontinent fund having soft-closed way back in January 2012. Saving himself from having to allocate surplus cash has clearly benefited performance.
Gait is committed to what he terms sustainable investment, which he stresses is not simply the same as green or ethical investing. Rather, he characterises it as a risk-control technique that limits his exposure to companies likely to incur wrath of one sort or another.
For instance, one of his largest holdings is Dr Reddy’s Laboratories. This pharmaceutical firm paid tax at a rate of 24% in 2012, considerably higher than its peer group; for comparison, local rival Sun Pharma paid just 4%. Gait preferred to back the former on the basis that it was not exposing itself to future liabilities.
Three-year total return: 11.8%
Hugh Young, Aberdeen
Running a staggering 15 times more money in India is Aberdeen’s Hugh Young, the Citywire + rated lead manager of the group’s £2.9 billion Indian Equity fund. The fund’s performance has not been quite as stellar as Gait’s, but it is still above average on a risk-adjusted basis over five and three years.
Young has long been a fan of India: indeed, the largest holding in his £4.7 billion pan-Asia fund is actually his Indian Equity fund.
The manager has nevertheless recently expressed some concerns about valuations in India amid the electoral ‘enthusiasm’, particularly in the technology and consumer sectors to which he has substantial weightings. Young therefore warned of the potential for ‘some market wobbles ahead’, yet maintained that for the longer term ‘a BJP majority is just the shot in the arm India’s economy needs’.
Three-year total return: -3.4%
Stephen Dover, Franklin Templeton
By style they are bottom-up stock pickers. While they do incorporate broader economic considerations into their company analysis, they essentially seek businesses that can provide long-term growth independent of the economic cycle, which steers them towards a quality bias and management teams that protect shareholders’ interests.
One consequence of this is that the fund has tended to outperform when the market is struggling but lag in strong bull rallies. For instance, when the index soared by 80% in 2009, the fund recorded a more modest 63% gain. But in 2011’s crash, when the market dropped 37%, the Franklin Templeton fund lost only 31%.
At the moment the managers are sticking with quality; their portfolio has an average price-to-earnings ratio of 19 and is overweight in financial and consumer discretionary names.
Three-year total return: -11.7%
Avinash Vazirani, Jupiter
Avinash Vazirani is a 15-year veteran of Indian equities, who invests with a slight value bias. A high-conviction and low-turnover manager, he claims to be happy to build up large positions and run with them for a long time, so long as their growth potential has yet to be priced in.
At the moment Vazirani is more enthused by corporate fundamentals in India than macroeconomics and politics, although he recognises the beneficial effect the latter have had on the former.
‘Companies have weathered the downturn and absorbed the impact of higher interest rates by cutting costs,’ he explained. ‘Third quarter company results were the best in eight quarters, with earnings growth of over 20% according to research by IIFL Institutional Equities.’
Vazirani is underweight financials, favouring the consumer goods and technology sectors.